Kuk-Il Paper MfgLtd (KOSDAQ:078130) Is Making Moderate Use Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Kuk-Il Paper Mfg Co.,Ltd (KOSDAQ:078130) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Kuk-Il Paper MfgLtd

What Is Kuk-Il Paper MfgLtd's Debt?

As you can see below, Kuk-Il Paper MfgLtd had ₩41.3b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had ₩2.85b in cash, and so its net debt is ₩38.5b.

How Healthy Is Kuk-Il Paper MfgLtd's Balance Sheet?

The latest balance sheet data shows that Kuk-Il Paper MfgLtd had liabilities of ₩52.5b due within a year, and liabilities of ₩9.18b falling due after that. Offsetting this, it had ₩2.85b in cash and ₩20.0b in receivables that were due within 12 months. So its liabilities total ₩38.8b more than the combination of its cash and short-term receivables.

Since publicly traded Kuk-Il Paper MfgLtd shares are worth a total of ₩657.0b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Kuk-Il Paper MfgLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Kuk-Il Paper MfgLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 34%, to ₩101b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Kuk-Il Paper MfgLtd managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost ₩6.4b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩2.0b of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Kuk-Il Paper MfgLtd (1 is a bit unpleasant!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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